new characteristics of inequalities in the information society and ...

ISSN: 2247-6172;
ISSN-L: 2247-6172
Review of Applied Socio- Economic Research
(Volume 5, Issue 1/ 2013 ), pp. 86
URL: http://www.reaser.eu
e-mail: editors@reaser.eu
4. The differences of macro- and micro-prudential perspectives
According to Borio (2003) 1 the macro- and micro-prudential perspectives change towards their
objectives and their understanding about the nature of risk.
The traditional micro-prudential regulation aims to increase the security and stability of the
individual financial institutions compared to macro-prudential regulation that is most focused in the welfare
of the financial system as a whole.
Further, the risk has been supposed to be exogenous under the micro-prudential perspective, in the
supposed meaning of a "potential shock" causing a financial crisis that originates beyond the financial
system behavior.
The macro– and micro-prudential perspectives compared
Macroprudential
Microprudential
Proximate objective Limit financial system-wide Limit distress of individual institutions
distress
Ultimate objective Avoid output (GDP) cost Consumer (investitor/depositor)
protection
Characterisation of risk Seen as dependent on Seen as independent of individual agents
collective
behavior behavour (“exogenous’)
(“endogenous”)
Correlations and common
exposures across important
irrelevant
institutions
Calibration of prudential
controls
In terms of system-wide risk;
Top-down
In terms of risk of individual institutions;
bottom-up
On the other hand, macro-prudential approach admits that the risk factors can be configured
and endogenous, in other word with a systemic occurrence.
In accordance with this argumentation, macro-prudential policy is addressed to individual financial
institutions, markets and their common exposure to risk economic factors. It is also focused in the "procyclical"
behavior of the financial system in the effort to promote its stability.
5. Implementation of counter-cyclical regulation
There is a growing consensus that the most important manifestation of market failure in banking and
financial markets through the decades is pro-cyclicality. The credit mistake is made during the boom and this
is very obvious. A rapid increase in loan portfolios is tightly associated with an increase in non-performing
loans. Loans given during booms have a higher probability of being default than those made in periods of
slow credit growth. The collateral requirements are often relaxed in good times as collateral prices rise and
tightened in bad periods.
There is an agreement of Basel II and Financial Reporting Standards which consists in an additional
pro-cyclical impact over the capital required by banks, reinforcing further the natural tendency of banks
for pro-cyclically loans. Counter-cyclical bank regulation can be introduced, through banks’ provisions or
through their capital. It is important that this is done through simple rules, so regulators cannot stay calm in
boom times, when they can become over-enthusiastic in booms.
1 Borio, C. (2003). Towards a macro-prudential framework for financial supervision and regulation? BIS working Papers No 128,
February